Every year, thousands of nonprofit organizations are formed. Most of these fall under the category of a 501(c)(3). These are the organizations that most people think of when they hear the term “nonprofit.” They’re either public charities or private foundations or private operating foundations serving broad purposes and formed for religious, educational, charitable, scientific, or literary purposes, or for testing for public safety, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals.
That said, there are a great many purposes that are not covered under the 501(c)(3) designation. One major category of organization is the 501(c)(7) organization, which covers social and recreational clubs.
So, what is a 501(c)(7)? What a 501(c)(7) is or can be represents a great many different types of groups, ranging from neighborhood book clubs, to hunting, fishing and outdoor adventure and sporting clubs, country clubs, sororities and fraternities, and any other social group.
501(c)(3) vs. 501(c)(7)
While 501(c)(3) organizations serve a broad public and charitable purpose, a 501(c)(7) by definition is not “charitable” in nature, but is rather a membership organization formed to serve its own members. Both types of organizations are exempt from federal income tax according to IRS code; however, there are some important exceptions in the case of 501(c)(7) organizations. Additionally, unlike 501(c)(3) organizations, 501(c)(7) organizations do not solicit charitable donations. Membership dues and other payments to a 501(c)(7) do not constitute tax-deductible donations by the members themselves.
The IRS & 501(c)(7) Designation
The U.S. government originally granted 501(c)(7) organizations exemption from federal income tax with the passage of the Revenue Act of 1916. As long as a social club is “organized for pleasure, recreation, or other nonprofit purposes,” it can qualify as exempt from federal income tax under IRS code 501(c)(7), but only with regard to income derived from dues and other payments by members. Plus, social clubs constitute a unique category of nonprofit in which all passive income — including investment from dividends, rents, and interest — is subject to federal income tax.
Moreover, IRS requirements for tax exempt status for social clubs are as follows:
- The club must serve tax-exempt purposes.
- Members must have an opportunity for personal contact between and among themselves and membership must be limited.
- The club must be supported primarily by membership fees, dues, and assessments.
- The organization’s net earnings may not insure to the benefit of any person having a personal and private interest in its activities.
- If the club exceeds certain guidelines for nonmember and investment income, it must prove that it is organized substantially for exempt purposes.
- The club may receive only insignificant income from nontraditional sources such as rents and interest income.
- The club cannot discriminate against any person on the basis of race, color, or religion.
501(c)(7) and Political Activity
Any tax-exempt organization that wishes to engage in political activity should seek out the advice of a qualified advisor with regard to the particular action it wants to take with regard to either public policy or the support of a candidate. That said, broadly speaking, groups defined as 501(c)(7) organizations have a fair bit of flexibility in terms of political activity. Specifically, they:
- May engage in lobbying without limitation, provided the lobbying is related to the organization’s “exempt” purpose.
- May engage in political campaigns on behalf of or in opposition to candidates; however, that engagement cannot constitute the organization’s primary activity.
- Can conduct nonpartisan voter education activities
- Are permitted to endorse federal and state candidates.
- Cannot contribute to PACs
How to Become a 501(c)(7)
As with most organizational formations, the steps to become a 501(c)(7) are relatively straightforward. That does not mean that they’re not a good deal of work. Steps to creating a 501(c)(7) are as follows:
- Organize. Establish a membership base and recruit a board of directors.
- Create Articles of Incorporation & Bylaws. While your board can work together to establish these essential documents, you should seek out the guidance of a knowledgeable advisor with an understanding of relevant state and local laws. Your 501(c)(7) bylaws must, especially, be consistent with state and local ordinances. Additionally, there’s an art to creating bylaws for a membership organization. They must be internally consistent with all other membership communication and they should be flexible enough to avoid excessive conflict while maintaining fair group dynamics.
- Establish a bank account and a way to collect membership dues and fees.
- File Proper Paperwork with the IRS. This includes filing for an EIN and applying for tax-exempt status through IRS form 1024.
Get Capable Assistance
As a nonprofit leader, your focus should be on higher-level aspects of organizational leadership and management. Learning the ins- and outs- of articles of incorporation and IRS applications and filings is simply not a great use of your time. That’s where we can help. There’s no need to spend precious hours delving into the technicalities of what is a 501(c)(7) when you enlist proper support.
Contact BryteBridge for assistance if you’re looking to start a 501(c)(7). We can help you with 501(c)(7) formation, including bylaws, or with any other issue relative to nonprofit startup, management, leadership, strategic planning, or governance.